In mid-June, Indonesia’s national airline Garuda Indonesia received approval 95 percent of his creditors restructure more than $9 billion of liabilities. According to Reuters, the deal requires creditors to “haircut” or write off a large amount of debt and exchange the remaining amount for $825 million in 9-year bonds and $330 million in stocks. This means that Garuda can consolidate its long-term liabilities, get some relief for others, and as air traffic resumes after the pandemic, it is likely to remain solvent and an ongoing concern as cash flow increases.
The past two years have been tough for Garuda, which, like many airlines, doesn’t own much of its fleet, but instead leases many of its aircraft from third parties. These lease liabilities are often disguised as operating expenses, depending on the nature of the accounting rules used. But they are always there, and if an airline has a sudden stop in cash flow, for example, caused by a pandemic, such obligations will suddenly become very noticeable.
In the case of Garuda, it became clear by last year that the airline would not be able to meet all of its obligations and ultimately defaulted on its obligations. $500 million Islamic bond. But in fact, these bonds, and those of major aircraft companies like Airbus or Boeing, have never made up the largest portion of Garuda’s outstanding liabilities. The majority was owed to the leasing companies, so getting their approval would be key to any successful restructuring plan.
After last year’s default, there were many rumors about the fate of the company. Statements about questionable lease transactions came to light. Leaders and ministers made dramatic announcements about plans to liquidate the airline, privatize it or rebrand it, all of which I considered unlikely. The state owns 60 percent of Garuda, and the airline plays more than just a commercial role in the country’s political economy.
It is a strategic asset and the government would not let it go under if there was no other choice. I wrote at the time for East Asia Forum that it is more likely that “Garuda corporate management and the government will use the threat of bankruptcy as leverage as they enter restructuring talks with landlords.” And that’s more or less the case.
So what does this mean for Indonesia’s other beleaguered SOEs and the country’s broader strategy of using debt and SOEs to spur economic growth? In recent years, there have been several high-profile debt restructurings or impending bankruptcies at other important state-owned companies, including Krakatau Steel and combat construction company Vasquita Karya. Does all this tell us that the state should stay away from the market and leave commercial enterprise to the private sector?
I do not think so. If anything, it shows that Indonesia’s strategy of integrating state-owned companies into global and domestic capital markets through various financial instruments has created a certain degree of economic resilience. The fact that Garuda can default and then go through a court-supervised debt restructuring without causing the financial problems of a wider systemic contagion highlights this point.
In other words, because Garuda raised funds through a combination of bonds, stocks, loans, and entered into direct contractual arrangements with foreign creditors such as aircraft lessors, it was able to spread the risk of default and then negotiate with its creditors in an orderly fashion. . This is very different from, say, the situation in Laos, where so much capital came in a single form (foreign direct investment) and from a single source (China).
In this case, one lender can use much more leverage, while systemic risk becomes highly concentrated and makes it more likely that any external shock will spread to the entire economy. When we look at countries or SOEs with many obligations, we must always take into account the following factors: what are these obligations? In the case of Garuda, the liabilities included bank debt from a number of different creditors, bonds, and leases, and although they were quite large in aggregate, Garuda also had options at its disposal to restructure them, including converting some of them into equity.
This is partly the result of conscious policy decisions by the Indonesian government in recent years to improve the resilience of the financial system by deepening domestic capital markets and diversifying sources of foreign capital. This gives struggling companies more options and spreads risk. And at least for now it has worked more or less as intended and Garuda lives to fly another day.